When a business purchases inventory to resell, they can do so without paying sales tax. In order to do so, the retailer will need to provide a California Resale Certificate to their vendor.
Learn more about what a resale certificate is, how to get one and more.
What is a Resale Certificate?
When retailers purchase products to resell, they often don’t pay sales tax to the supplier on the purchase. The sales tax will still be paid, but instead of the retailer paying sales tax, the retailer charges sales tax to their customer on the final value of the merchandise. The collected sales tax is then sent by the retailer to the California Department of Tax & Fee Administration.
For example, when a pet store purchases dog toys from their supplier to sell in the store, the pet store owner won’t typically have to pay sales tax to their supplier. When a customer (or end-user) purchases the dog toy, the retailer will charge sales tax to the customer based on the full price of the toy. The retailer will collect the sales tax from all their transactions and periodically (typically at the end of the month) send the sales tax to the state.
The purpose of the certificate is to provide evidence of why sales tax was not collected on a transaction. Similar names for a resale certificate include reseller number, seller’s permit, exemption certificate, wholesale license, or reseller’s license. In order for the supplier to allow the tax-exempt purchase, the seller needs proof the buyer intends to resell the product by providing a valid resale certificate.
The sales tax exemption is only intended to be used for inventory that will be resold and not intended for the tax-free purchase of items used in normal business operations such as paper, pens, etc.
Before a business starts selling products or providing taxable services, they must first get a California Seller’s Permit from the California Department of Tax & Fee Administration. The Seller’s Permit is sometimes referred to as a sales tax permit, sales tax number, or sales tax license.
The Sales Tax Permit and Resale Certificate are commonly thought of as the same thing but they are actually two separate documents. The Sales Tax Permit allows a business to sell and collect sales tax from taxable products and services in the state, while the Resale Certificate allows the retailer to make tax-exempt purchases for products they intend to resell.
After registering, a sales tax number will be provided by the California Department of Tax & Fee Administration. This number will be listed on the Resale Certificate.
A resale certificate can be generated by the buyer or seller provided their certificate contains the required information. To make things easier, the Department of Tax & Fee Administration has a Resale Certificate (BOE-230) that is available for download to document tax-free transactions.
BOE-230 Resale Certificate Fillable Form
How to fill out the California Resale Certificate – Form BOE-230
Filling out the BOE-230 is pretty straightforward, but is critical for the seller to gather all the information.
If audited, the California Department of Tax & Fee Administration requires the seller to have a correctly filled out BOE-230 Resale Certificate. Without it correctly filled out, the seller could end up owing sales taxes that should have been collected from the buyer in addition to penalties and interest.
Steps for filling out the BOE-230 California Resale Certificate
Step 1 – Begin by downloading the California Resale Certificate Form BOE-230
Step 2 – Enter the seller’s sales tax permit number
Step 3 – Describe the business activities of the seller
Step 4 – Enter the business name of the seller
Step 5 – Describe the property being purchased for resale. Be sure not to be generic and described by either by an itemized list or by a general description.
Step 6 – Enter the name, signature title, address and phone number of the purchaser
The resale certificate is kept on file by the seller and is not filed with the state.
Does a California Resale Certificate Expire?
A resale certificate in California is valid until it is revoked in writing by the seller, unless the certificate was issued for a specific transaction, which is generally good for up to one year.
Are sellers required to accept resale certificates?
Sellers are not required to accept resale certificates, however most do. If the vendor doesn’t accept the certificate, the buyer will have to pay sales tax on the merchandise being purchased. In most cases, they will be able to get a credit for the sales taxes paid later on their sales tax filing.
It the seller is out-of-state, California is one of a few states that don’t recognize out-of-state resale certificates. In order to purchase tax-free from vendors in other states, the buyer will have to register for a sales tax permit in the seller’s state.
What steps should a business take to accept a resale certificate?
When a business is presented with a resale certificate, the burden of proof is on the seller to verify that the buyer’s information is correct and to keep these records.
Failing to verify this information may put the liability of paying California sales taxes on the seller. It’s also important to note that a seller could end up with a misdemeanor charge if they issue a resale certificate in order to avoid collecting sales tax from a buyer. This charge can come with a fine of $1,000 to $5,000 and/or imprisonment for up to one year.
Before accepting a resale certificate, a seller should:
- Review the resale certificate to make sure it is completely filled out.
- Verify the purchaser’s sales tax permit by visiting the California Department of Tax and Fee Administration’s verification page or calling 888-225-5263.
- Sellers are also responsible for examining the certificate and evaluating whether the goods sold are reasonably consistent with the purchaser’s line of business. For example, if the buyer’s business is a car dealership but they are wanting to purchase office supplies tax-free, the seller may want to investigate further.
- Keep a file of resale certificates.